Major share indexes slipped in Asia on Monday and oil prices briefly hit five-month highs as investors anxiously waited to see if Iran would retaliate against U.S. attacks on its nuclear sites, with resulting risks to global activity and inflation.
Most of the market moves were restrained, with the dollar getting a modest safe-haven bid and no sign of a rush to bonds. Oil prices were up around 1.5%, but well off their initial peaks. O/R
Optimists were hoping Iran might back down now that its nuclear ambitions had been curtailed, or even that regime change might bring a less hostile government to power there.
"Markets may be responding not to the escalation itself, but to the perception that it could reduce longer-term uncertainty," said Charu Chanana, chief investment strategist at Saxo.
"That said, any sign of Iranian retaliation or threat to the Strait of Hormuz could quickly shift sentiment and force markets to reprice geopolitical risk more aggressively."
The Strait of Hormuz is only about 33 km (21 miles) wide at its narrowest point and sees around a quarter of global oil trade and 20% of liquefied natural gas supplies.
Analysts at JPMorgan also cautioned that past episodes of regime change in the region typically resulted in oil prices spiking by as much as 76% and averaging a 30% rise over time.
"Selective disruptions that scare off oil tankers make more sense than closing the Strait of Hormuz given Iran's oil exports would be shut down too," said Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia.
"In a scenario where Iran selectively disrupts shipping through the Strait of Hormuz, we see Brent oil reaching at least $100/bbl."
Goldman Sachs warned prices could temporarily touch $110 a barrel should the critical waterway be closed for a month.
For now, Brent LCOc1 was up a relatively mild 1.4% at $78.07 a barrel, while U.S. crude CLc1 rose 1.4% to $74.88. Elsewhere in commodity markets, gold edged down 0.3% to $3,357 an ounce XAU=. GOL/
KEEP CALM AND CARRY ON
World share markets were proving resilient so far, with S&P 500 futures ESc1 off just 0.1% and Nasdaq futures NQc1 down 0.2%.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 1.0%, while Chinese blue chips .CSI300 dipped 0.2%. Japan's Nikkei .N225 eased 0.2%, though surveys showed manufacturing activity there returned to growth in June after nearly a year of contraction.
EUROSTOXX 50 futures STXEc1 lost 0.4%, while FTSE futures FFIc1 fell 0.3% and DAX futures FDXc1 slipped 0.4%. Europe and Japan are heavily reliant on imported oil and LNG, whereas the United States is a net exporter.
The dollar gained 0.7% on the Japanese yen to 147.07 yen JPY=EBS, while the euro dipped 0.2% to $1.1497 EUR=EBS. The dollar index firmed marginally to 99.042 =USD.
There was also no sign of a rush to the traditional safety of Treasuries, with 10-year yields US10YT=RR rising 2 basis points to 4.395%.
Futures for Federal Reserve interest rates 0#FF: were a tick lower, likely reflecting concerns a sustained rise in oil prices would add to inflationary pressures at a time when tariffs were just being felt in U.S. prices.
Markets are still pricing only a slim chance the Fed will cut at its next meeting on July 30, even after Fed Governor Christopher Waller broke ranks and argued for a July easing. 0#USDIRPR
Most other Fed members, including Chair Jerome Powell, have been more cautious on policy leading markets to wager a cut is far more likely in September.
At least 15 Fed officials are speaking this week, and Powell faces two days of questions from lawmakers, which is certain to cover the potential impact of President Donald Trump's tariffs and the attack on Iran.
The Middle East will be high on the agenda at a NATO leaders meeting at the Hague this week, where most members have agreed to commit to a sharp rise in defence spending.
Among the economic data due are figures on U.S. core inflation and weekly jobless claims, along with early readings on June factory activity from across the globe.
